5/10/2018 GettingOffShoringRight-slidepdf.com http://slidepdf.com/reader/full/getting-off-shoring-right 1/10 TOOL KI It's not easy to make money by offshoring business processes, many CEOs are discovering. Companies benefit oniy when they pick the right processes, caicuiate both the operational and structural risks, and match organizational forms to needs Getting Offshoring Right by Ravi Aron and Jitendra V. Singh I N 2003, ALPHA CORP., a well-known U.S.-based organization, offshored and outsourced several customer-retention processes. When the company found that some of its customers seemed likely to switch to rivals, it provided data on them to an outsourcing firm in India. The service provider called those cus- tomers and, on Alpha Corp.'s behalf, offered them fee waivers, upgrades, and free financial products as incentives to remain with Alpha Corp. A common, but rarely discussed, off- shoring scenario then played out. The vendor's employees were enthu- siastic, but they didn't have much expe- rience selling sophisticated financial products such as disability and loss-of- income insurance. As a result,they didn't know how to interpret customers' re- sponses to the incentives they were offer- ing and found it difficult to decide what to do when customers asked them for other incentives. In fact, the provider' employees often placed people on hold in order to contact Alpha Corp.'s super visors and ask whether to give custom ers what they wanted.^ As the demand on Alpha Corp.'s marketing manager rose and the vendor was unable to re tain as many customers as it had hoped Alpha Corp.'s executives began to won der, "What have we done?" They aren't the only executives ask ing that question today. Cut through the hype, and you'll find that, like Alph Corp., many companies are waking up and smelling the harsh realities of off shoring. Sure, the prospect of offshoring and outsourcing business processe has captured the imagination of CEOs everywhere. In the last five years, many companies in North America and Eu rope have experimented with this strat egy, hoping to reduce costs, become more efficient, and gain a little strategic
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5/10/2018 Getting Off Shoring Right - slidepdf.com
to the more important aspect. For in-stance, retail banks helieve tha t making
money is tougher tha n developing new
consumer finance products. They tend
to rate the value-capture aspect of their
processes higher than they do the value-
creation dimension.
By ranking all the company's pro-
cesses, executives can crea te a value hi-
erarchy. The higher a process's rank in
the hierarchy, the more crucial it is to the
comp any's strategy, and the less the or-
ganization should think about moving
it offshore or outsou rcing it. The hierar-
chy tells companies where the fault
lines betw een processes are and lays ou t
an offshore migration pa th. For exam-
ple, at one U.S.-based computer and
communications equipment manufac-
turer we worked w ith, senior executives
unanimously agreed that of six pro-
cesses in the finance function, manag-
ing the float for suppliers and dealers
had the highest relative importance(see the exhibit "Creating a Value Hier-
archy of Processes"). That alerted man-
agers that it would he risky to offshore
or outsource the process; even if the
service provider made only a few er-
rors, it would hurt the firm's dealers
and suppliers financially and tarnish
the company's reputation. The execu-
tives also felt that managing the com-
pany's working capital was too impor-
tant to offshore. At the same time, the
group decided that three other pro-
cesses - invoice verification, pay me nt
authorization, and revenue and expense
repo rting -w ere less valuahle and that
the company could think about off-
Creating a Value H ierarchy of Processes
Executives in a company's f inance dep artmen t, charged with ident ifyin g business
processes to offshore, ranked six processes on the ir abi lity to create value for cu stom-ers and on their abil ity to capture vaiue for the business. They then added the value-
creation rankin g and the value-capture rankin g togethe r to arrive at a total for each
process. Wh en they stud ied the fin al rankings, or hierarchy, the executives agreed
tha tth ey c ould offshore the three low est-ranking processes; the tw o highe st-ranking
processes, they de cided , were to o strategically valuable to offshore.
must retain enough in-house expertiseto train new p roviders. Otherwise, busi-
nesses will have to ask incumbent pro-
viders to train potential rivals, which,
in our experience, never works well.
Finally, companies face the risk that
rivals may steal their intellectual prop-
erty and proprietary processes if they
transfer processes offshore, especially
to emerging markets. There's no sure-
fire way organizations can protect them-
selves against this risk unless they set
up dedicated facilities offshore. Com-panies should decide they want to do
that only after evaluating al! their or-
ganizational options, and in the next
section of this article, we will explore
that process of evaluation.
Choose the Right
Organizational Form
Most companies believe tha t they m ust
either perform processes in-house or
outsource them. That was true in the
1990s; today, however, companies canenter into joint ventures with other
companies in the same industry or in
other industries to generate services or,
like GE, use the huild-operate-transfer
mechanism to create ventures that evolve
from being part ofthe company into in-
dependent service providers.
Companies should match organiza-
tional structures to needs by considering
both th e structural and operational risks
ofoffshoring processes. In general, they
can use location-onshore, nearshore,
or offshore-to combat operational risk,
and organizational structures - such as
captive centers and joint ventures-to
respond to structural risk (see the ex-
hibit "Choosing the Right Location and
Organizational Form"). When bo th the
operational and structural risks of off-
shoring processes are low, companies
can outsource them to overseas service
providers. As the operational risk ofoff
shoring processes rises, locating them
offshore becomes more dangerous.Companies should transfer processes
that possess high levels ofoperationai
risk to nearby countries rather than to
distant overseas locations. When the
operational risk is very high, setting up
captive centers locally is often the best
solution. Outsourcing is less attractive
in the case of processes with moderate
or high structural risk; here, other forms
of governance, such as joint ventures
and captive centers, become b etter op-
tions. In the case of processes that havevery high levels of structural risk, out-
sourcing isn't feasible. Companies m ust
set up captive centers to execute those
processes. Finally, when both opera-
tional and structural risks are very high.
Cho osing the Right Location and Organizational Form
Once a com pany has dete rmi ne d the ope ration al and structu ral risks of outsou rcing its processes, it can usethis g rid to choose the best locations and org aniz ation al fo rms for those tasks. The n ine cells in this tabie show
the optimal offshoring responses to different levels of risk.
4J
a.
O
r
HIG
LU
5UJ
Q
U
0
Outsource to service provider
located nearby
(nearshore)
Lit igation support
Offshore and outsource to
service provider over t ime
Insurance claims processing,
customer support
Offshore and outsource
to service provider
Data entry,
transaction processing
Set up captive center
nearby or onshore
R&D, desig n
Use extended organizat ion
offshore, but monitor closely
in real t ime
Supply chain coo rdination.
bioinformatics
Use extended organizat ion
offshore
Teiecol lection.
technical support
Execute process in house
and onshore
Pricing,
corporate planning
Set up captive
center offshore
Equity research
Use extended organizat ion
offshore, but condu ct f reque nt
process au dits
Customer data analysis.
market research analysis
LOW MODERATE HIGH
5/10/2018 Getting Off Shoring Right - slidepdf.com
that level of quality more cheaply thanthe captive center did. When we studied
processes that w ere more complex, the
same results held: The extended organi-
zation started out relatively poorly but,
after it reached a stable state, was the
most cost-effective way to execute pro-
cesses. Clearly, offshoring isn't just ab ou t
companies moving across geographical
boundaries; it's also about companies
redrawing organizational boundaries to
achieve collaborative supply chains of
information, expertise, and knowledge.
It may sound like a cliche, but compa-
nies must tre at offshoring as a strategic
imperative if they wish to capture all
its benefits, Offshoring initiatives that
have cost savings as their raison d'etre,
our studies shovw, don't allow companies
to capture greater revenues from the
market. That's because such companies
don't comm it themselves to the organi-
zational changes that are necessary foroffshoring to help them , say, customize
products or services, lock in buyers,
compress new product-development
cycles, or enhance profit margins. Be-
sides, when offshoring is only about
cutting costs, businesses are reluctant
to outsource complex processes, even
though doing so wiil have a bigger im-
pact on their bottom lines. However,
when corporations begin w ith the desire
to create strategic advantage through
offshoring, they commit themselves totransferring complex processes rela-
tively early. Companies would do well
to remem ber that the m anner in which
they start their offshoring initiatives
often determ ines how they will end. ^
i ."Atpha Corp."is a pseudonym. For more details on
the offshoring problems faced by this company, seeRavi Aron, Eric K. de m on s, and Sashi Reddi ,"Jus t
Right Outsourc ing: Unders tanding and Managing
Risk,'7oijma/ of Manag etnent Information Systems,
Fall 2005.
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